Last week the Fed came out with one of the more hawkish statements in recent history, strongly implying that there would be a rate hike before the end of the year. In response, bond markets improved. Go figure. Yields on 10-year Treasuries rose as high as 1.73% prior to the meeting, the highest levels seen since before the Brexit vote in late June. I would have figured that the rise in yields that occurred during the run-up to the meeting was the market pricing in the high probability of a hike in December. It would seem this perception was confirmed by the Fed statement and that yields should have remained approximately the same, or risen somewhat. This did not happen at all. Since the Fed statement, rate have slowly crept back down, and are floating around 1.60% this morning. Mortgage rates also improved late in the week. The Primary Mortgage Market Survey from Freddie Mac showed the average rate on a 30-year fixed-rate mortgage was 3.48% with 0.6 points early-to-mid last week. It doesn’t necessarily reflect the improving market that we saw on Wednesday and Thursday.
I’m hard-pressed to give you an explanation for the market action. Perhaps some took it as the opportunity to buy the dip? Perhaps there was some short-covering going on? Random noise? I’m not going to pretend to have a solid explanation for what happened last week (and is continuing now). Whatever the reason, mortgage rates have come down from levels not seen since the early summer.
Click here to get today’s latest mortgage rates.
The week that was:
There was little economic data last week. The main event was the Fed meeting. It was widely anticipated that the Fed would pave the way for a rate hike in December, and that was largely what happened*. The statement was definitely more upbeat than in recent months:
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market conditions will strengthen somewhat further. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.”
The “roughly balanced” risks portion has been upgraded, and could be a sign that the committee is ready to hike. Also of note, there were three dissensions from this statement, all of whom were in favor of an immediate hike.
*There is a Fed meeting in November, but it occurs just prior to the election. Due to this, and the perceived closeness of the election, there seems to be almost no chance that we’d see a hike at that meeting.
The question really is this: will the economic data that we see between now and the next two meetings be strong enough to sway the remaining doves on the Fed to vote for a hike in December? Because if it isn’t, the make-up of the FOMC shifts considerably in 2017. All three of the dissenting members become non-voters, and three more dovish members shift onto the voting committee. As always, Tim Duy has an insightful piece on his blog “December Looking Good. But…”
The implied rate of a hike in December right now is 53.1%. There are three jobs reports due out before the December Fed meeting, and they could all be very influential. Rates will fluctuate with the domestic data over the next couple of months. And then, of course, is the election. If Trump were to win, I think all traditional analysis goes out the window. Hic sunt dracones. If Hillary wins, I think it will be business as usual, and we would ultimately see a hike in December.
The rate outlook:
Presently, rates are down. There’s not a lot of important economic data scheduled this week, but we do hear from a lot of Fed members. I highly doubt we’ll learn anything new, but those speeches could cause rates to move somewhat. Ignoring potential swings in the predicted outcome of the election (particularly with whatever goes down at the debates, which begin tonight), the next truly important event that we have is the September jobs report, which comes out on Friday, October 7th.
In the meantime, I don’t think rates will deviate significantly from current levels. Then again, I was totally wrong about what I thought would occur after last week’s Fed meeting, so take it all with a grain of salt. Nobody truly knows what is going to happen. If you are looking to refinance, I recommend doing it sooner rather than later. Rates are historically low, but things can change in a hurry. If you’re buying, now remains a good time to lock in a great long-term rate.
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